Paydays have come and gone, and more are right around the corner. The longer the COVID-19 pandemic (and its impact on the economy) continues, the harder it becomes for small businesses to survive. If you're running out of capital and can't afford to pay your employees on their next payday, don't panic. You have options.
The CARES Act, along with local and state government resources, provides financial help to get you and your employees through this disaster — from low-interest (and even potentially no-interest) small business loans to a refundable tax credit. The only downside is there are so many options to consider, and paralysis by analysis is a real struggle. That's why we're here to help.
Below we'll cover 9 straightforward options for you to consider if you can't make payroll because of the coronavirus.
9 Ways to Cover Payroll During COVID-19
- SBA Paycheck Protection Program (PPP) Loans
- Economic Injury Disaster Loans (EIDL)
- State and local resources
- Tax provisions
- Business line of credit
- Business credit card
- Invoice financing or factoring
- Friends and family
- Conserve your cash
1. SBA Paycheck Protection Program (PPP) Loans
The Paycheck Protection Program is an extension of the popular SBA 7(a) loan program. PPP loans provide the lesser of $10 million or 2.5 times your average monthly payroll. Any expenses made in the first 8 weeks of the loan that cover payroll, mortgage interest payments, rent, or utilities are eligible to be forgiven (up to 100%).
If payroll is your primary issue, then a Paycheck Protection Program loan may be just what you're looking for. Use it to cover salaries, wages, commissions, and even cash tip payments.
Any portion of the loan that is not forgiven will carry a 1% flat interest rate and repayment terms of two years. These loan payments are deferred for the first 6 months, but interest will still accrue during the deferral period.
2. Economic Injury Disaster Loans (EIDL)
An EIDL provides small businesses with up to $2 million in working capital to cover day-to-day expenses during an emergency. EIDLs have always been around, but they've shifted their requirements and response time to adapt to the COVID-19 pandemic. Now, more businesses can get the capital they need in less than a month.
If you qualify for an EIDL, you can also request an EIDL advance for up to $10,000. Any portion of this loan used on payroll is eligible to be converted into a grant, even if you end up not being approved for an EIDL.
EIDLs come with 3.75% interest rates, and repayment terms can be as long as 30 years.
And if you need to, you can grab a PPP loan and an EIDL at the same time. As long as you use the loans for different expenses (for example, you couldn't use both on July’s employee wages), it's okay to stack these SBA loans.
3. State and Local Resources
State and local governments are offering several financial relief plans to alleviate COVID-19 impacts. You can find everything from zero-interest small business loans to grants to eviction bans to help you cover your payroll costs. Here are a few examples:
- Idaho offers a WaFD Small Business Credit Line that provides a 5-year credit line (with the first 90 days interest-free) to all businesses who have experienced at least a 10% drop in revenue.
- Pennsylvania's Small Business First Fund provides working capital loans up to $100,000 to small businesses. These loans have a 3% interest rate and the possibility of an even lower rate.
- Washington is offering tax relief programs to temporarily suspend penalties for late payments, pausing audits, and other measures.
Fortunately, there's an ever-growing catalog of state and local financial resources available to your business—too many for us to cover them all here. Check out this list for an up-to-date curation of relief programs near you.
4. Tax Provisions
Under the CARES Act, businesses that have been impacted by COVID-19 have access to both a Social Security tax deferral and an Employee Retention Credit.
Social Security Tax Deferral
Small businesses can defer the employer’s portion (deposit and payment) of Social Security taxes, as well as certain “railroad retirement taxes”. This applies to the time period beginning on March 27, 2020, and ending December 31, 2020.
50% of the deferred amount will be due on December 31, 2021, and the other 50% will be due on December 31, 2022. There are some conditions with this deferral related to the Paycheck Protection Program that you’ll want to be aware of, though.
Employee Retention Credit
Small businesses can also take advantage of a 50% refundable payroll tax credit of up to $10,000 in qualified wages (including certain health plan costs) per employee. To qualify, you must either have experienced:
- The full or partial suspension of your business
- A significant decline in gross receipts
You can find more information about the Employee Retention Credit and how to claim it by checking out this announcement from the IRS.
If you have a PPP loan, you’re ineligible for the Employee Retention Tax Credit. If you have neither yet, you’ll want to weigh your options before you proceed with your choice of relief.
5. Business Line of Credit
A business line of credit is handy to keep in your back pocket, even if there isn't a global pandemic. A line of credit is a flexible financial safety net for your business. Use it to cover payroll, purchase equipment, or just to pay the monthly bills.
It's revolving credit, meaning you can use it, repay, and reuse it as many times as you want. And if you never use it, no problem. There's no harm keeping one handy in case you're ever in a pickle—like now.
If you use your business line of credit, say, on July’s payroll, then you'll only pay interest on the funds you use (not the full credit line).
6. Business Credit Card
A business credit card and a line of credit share a lot in common. They both give you access to money up to a certain limit, require you only pay interest on the funds you use, and are revolving.
Unlike a line of credit, many business cards come with rewards programs, promotional offers, and cash-back bonuses. Many also come with a 0% introductory APR, meaning you could score a card that'll help you cover payroll interest-free for up to 21 months.
7. Invoice Financing or Factoring
If you need to free up some cash flow to make payroll, consider turning your IOUs into cold, hard cash with invoice financing. With invoice financing (or invoice factoring), you essentially sell your outstanding invoices at a discount in exchange for immediate cash.
By tapping into invoice financing, you can stop wasting time following up on all your customers and use the money to pay your employees.
8. Financing From Friends and Family
Friends and family aren't the most reliable source of financing, but they can help get you out of a bind at a moment's notice. This kind of lending often comes with no (or low) interest fees and zero paperwork. Win-win.
However, your close relationships don't often have a lot of cash to spare—especially during a crisis like this, so they can only help with so much. Be careful about mixing your business and personal life. Family and friends could be a lifeline now, but borrowing their cash could come back to bite you later.
9. Conserve Your Cash
Obtaining additional capital isn't the only way to cover payroll—sometimes you have to cut in other areas to free up the necessary cash.
Consider areas where you can save money. You might want to limit your inventory to cut storage costs or reduce work hours when business is slow. Employees probably won't ike a reduction in hours (and money), but if there are no other options, some pay is better than no pay.
Negotiate With Your Partners
Talk to your creditors, lenders, suppliers, and landlords to see if you can temporarily defer payments or work out some kind of deal. These businesses need money, too, but they also want their relationships to endure this crisis. They need you to survive.
Sell Off Inventory or Equipment
Selling inventory at a discount can help you get immediate cash and eliminate warehouse rental costs. You can also consider selling any equipment that's sitting in the corner gathering dust. You may be able to sell it for a pretty penny now and buy a perfectly good used alternative later.
Plan Your Finances for the Future
For many business owners, employees are like family. And according to a recent survey of 1,005 workers from Zenefits, for a large part, employees are satisfied with their employer’s efforts to keep them employed.
When you’re cash-constrained, your options to help are limited, but not non-existent — there are a number of low-interest loans, local financial assistance, tax provisions, and other short-term emergency financing options to help.
If you’ve tried everything, and you’ve already had to (or will have to) furlough or lay off employees, there are other things you can do to help them weather their own COVID-19 financial challenges.
Always make sure to communicate. You need to let your employees know where your business stands, so they can get a head start on financial assistance if needed. There are also a number of programs offered to help American workers who’ve lost their jobs, including unemployment insurance, paid family leave, and paid sick leave.
Additionally, many businesses — from restaurants to bookstores to construction companies — are launching fundraisers on crowdfunding sites to help supplement the income of their laid off or furloughed employees during COVID-19. Plus, through GoFundMe's Small Business Relief Fund, businesses that raise at least $500 in donations on their fundraising page are eligible for one-time matching grants.
As an employer, you’re doing the best you can. If you’ve had to (or foresee) having to lay off employees due to cash constraints, consider this short-term fix as a way for your business to survive to a post-COVID world where you can reinstate your workforce.